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Business Energy

Russia's oil export ban: Deliveries to India, China not covered

Most of initial gains in oil prices evaporated by the end of the trading session



Industrial facilities of PCK Raffinerie oil refinery are pictured in Schwedt/Oder, Germany, March 7, 2022. The company receives crude oil from Russia via the 'Friendship' pipeline.
Image Credit: Reuters

New York: Russia's move to ban oil sales to countries and companies that comply with a price cap agreed by Western nations briefly helped lift crude prices.

"The supply of Russian oil and oil products to foreign legal entities and individuals is prohibited if the contracts for these supplies directly or indirectly" are using a price cap, a presidential decree said.

The decree will be in effect from February 1 until July 1. It added that the ban may be lifted in individual cases on the basis of a "special decision" from Russian President Vladimir Putin.

$60 per barrel price cap

The price ceiling of $60 per barrel agreed by the European Union, G7 and Australia came into force in early December and seeks to restrict Russia's revenue while making sure Moscow keeps supplying the global market.

Oil prices initially jumped on the announcement and analysts pointed to expectations for stronger demand due to reopening actions by China after lengthy COVID-19 restrictions.

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Oil deliveries to India, China

But most of the gains in oil prices had evaporated by the end of the trading session. Analysts have noted that Moscow's move will not impede deliveries to India, China and other importers that did not join the price cap.

Brent oil futures for delivery in February ended up 0.5 per cent at $84.33 a barrel. US benchmark West Texas Intermediate for delivery in February slipped less than 0.1 per cent to $79.53 a barrel.

The Russian action "should not come too much as a surprise for the market really, given what we heard from them over the recent months," said Matt Smith of Kpler.

"It'll tighten things up a bit, but not too much."

Price cap and embargo

Introduced alongside an EU embargo on seaborne deliveries of Russian crude oil, the cap aims to ensure Russia cannot bypass the embargo by selling its oil to third countries at high prices.

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Russia has said the cap will not affect its military campaign in Ukraine and expressed confidence it would find new buyers.

Three-week high

On Tuesday, oil touched a three-week-high Tuesday as China's latest relaxation of COVID-19 restrictions fueled prospects of a demand revival, while production in the United States was impacted by winter storms.

Brent Crude was up $1.22, or 1.5 per cent, at $85.14 a barrel by 1:07pm EST (1807 GMT) and U.S. West Texas Intermediate crude rose $1.06 to $80.62 per barrel, a 1.3 per cent gain, according to Reuters.

Both benchmarks hit their highest level since December 5 earlier in the session. UK and U.S. markets were closed on Monday for the Christmas holiday.

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